Process: 9/2014-T

Date: June 16, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 9/2014-T addresses the legality of IRC autonomous taxation on variable remuneration (bonuses) paid to company directors by entities within a tax group under Article 88(13)(b) of the IRC Code. The parent company of a 14-company fiscal group challenged €585,888.45 in autonomous taxation for fiscal years 2010-2011, arguing the provision should only apply to bonus amounts exceeding statutory thresholds (€27,500 or 25% of annual remuneration, whichever is higher), not the entire bonus. The claimant contested the self-assessments through administrative appeals (reclamações graciosas), which were dismissed, leading to CAAD tax arbitration proceedings. Constitutional challenges were raised, alleging violations of equality, proportionality, and taxpaying capacity principles, noting that these bonuses already face additional PIT taxation (up to 8.5% surcharge) and that Portuguese law permanently applies measures inspired by temporary UK and French financial sector interventions. The case examines whether autonomous taxation at 35-45% rates on director bonuses within the RETGS regime (article 69 et seq. CIRC) constitutes unlawful taxation, and whether compensatory interest is due on amounts deemed improperly collected. The arbitral tribunal was constituted under RJAT (Decree-Law 10/2011) to determine the validity of these self-assessments and the parent company's right to reimbursement with statutory interest from the payment dates.

Full Decision

ARBITRATION DECISION

I. REPORT

  1. The company A... — …, S.A., Tax Identification Number …, in its capacity as the parent company of a group (the A... Group) subject to the special tax regime for groups of companies provided for in article 69 et seq. of the Corporate Income Tax Code (in its current numbering) filed a petition for the constitution of a sole arbitral tribunal, in accordance with the combined provisions of articles 3, nos. 1 and 2, and 10, nos. 1 and 2 of Decree-Law no. 10/2011 of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to as RJAT), and articles 1 and 2 of Regulation 112-A/2011 of 22 March, with a view to the declaration of illegality of the Corporate Income Tax (IRC) self-assessment acts, relating to the fiscal years 2010 and 2011, in the amounts respectively of €455,000.00 and €130,888.45, for a total of €585,888.45, the acknowledgement of the right to restitution of tax unduly paid, together with compensatory interest at the statutory rate calculated from 1 September 2011 as regards the amount of €455,000.00 (fiscal year 2010) and from 1 September 2012 as regards the amount of €130,888.45 (fiscal year 2011), until full reimbursement.

  2. In the petition for arbitral pronouncement, the Claimant chose not to designate an arbitrator, whereby, in accordance with the provisions of article 6, no. 2 a) of the RJAT, the signatories were designated by the Deontological Council of the Center for Administrative Arbitration as arbitrators — Jorge Lino Ribeiro Alves de Sousa, José Poças Falcão, and Luís Menezes Leitão, in accordance with the provisions of no. 1 of article 6 of the RJAT.

  3. The tribunal is regularly constituted to hear and decide the subject matter of the proceedings.

  4. The allegations supporting the Claimant's petition for arbitral pronouncement are, in summary, as follows:

4.1. The Claimant, in its capacity as parent company of the aforementioned Fiscal Group comprised of 14 companies, submitted its consolidated IRC return Form 22 relating to the fiscal years 2010 and 2011, at which time it proceeded to self-assess the autonomous taxation for those same years, as shown in the consolidated returns of the Fiscal Group — Form 22 — which it attached as Docs. nos. 1 — relating to 2010 —, 2 and 3 — relating to 2011 —, and paid the corresponding tax (field 368, form 10).

4.2. Among the taxes were €455,000 (2010) and €130,888.45 (2011) in autonomous taxation relating to bonuses (variable remuneration) paid to directors (article 88, no. 13, subparagraph b), of the CIRC) by the company forming part of the fiscal group A..., B... SGPS (Docs. nos. 4 and 5, attached with the initial petition).

4.3. These variable remunerations and autonomous taxation corresponded, in 2010, to the following:

[Table showing remuneration details for 2010 with columns for Fixed Annual Remuneration, Variable Remuneration, Total 2010 Remuneration, 25% of Total Annual Remuneration, Amount Subject to Autonomous Taxation, Autonomous Taxation Rate, and Value of Autonomous Taxation]

4.4. And in 2011 they corresponded to the following:

[Table showing remuneration details for 2011 with similar columns as above]

4.5. On 24 May 2013, the Claimant filed, with the Tax Office of …, administrative appeals (reclamações graciosas) against the aforementioned autonomous taxation self-assessments relating to the fiscal years 2010 and 2011, contained in the IRC return form 22 (it attached copies of the cover sheets of the administrative appeals as Docs. nos. 6 and 7).

4.6. Through an official letter dated 14 November 2013, the Claimant was notified of the dismissal of the aforementioned administrative appeals relating to autonomous taxation on variable remuneration/bonuses for the fiscal years 2010 and 2011 (Docs. nos. 8 and 9).

4.7. The Claimant considers that the self-assessment acts, insofar as they concern autonomous taxation levied on bonuses for the fiscal years 2010 and 2011, should be declared illegal and annulled, as they suffer from a defect of illegality.

4.8. In the Claimant's view, a restrictive interpretation should be given to subparagraph b) of no. 13 of article 88 of the CIRC, in conformity with its inspirational source in the tax systems of the United Kingdom and France, which only apply this taxation to the financial sector and on a transitional basis, considering that the intent is to subject to autonomous taxation only bonuses that exceed the minimum thresholds set by the Portuguese legislator, namely €27,500 or 25% of annual remuneration, whichever is higher.

4.9. The claimant argues that, otherwise, there would be an inconsistency of this provision with the Portuguese Constitution, as there would then be a violation of the principle of equality and proportionality, since it would make no sense to subject to autonomous taxation also the portion of the bonus that does not trigger such taxation, under penalty of treating without regard to the measure of inequality and, consequently, without regard to the principle of proportionality.

4.10. Generally, the Claimant further argues that there is unconstitutionality of the autonomous taxation of these bonus expenses in IRC, as it would be unjustifiable and discriminatory, in that the income in question is already subject to extraordinary additional taxation in Personal Income Tax of 3.5% plus another that can reach 5%, totaling 8.5% (in addition to the base taxation in Personal Income Tax), unlike the other income subject to other autonomous taxation, to which is now added the rate (so-called autonomous taxation rate) of 35% or even 45% (aggravation on the pretext of determining tax losses).

4.11. The Claimant argues that, under penalty of violating article 2 (principle of democratic rule of law) and 62 (guarantee of the right to private property and prohibition of expropriations without just compensation) of the Constitution, autonomous taxation, as unilateral and coercive impositions aimed at patrimonial appropriation by the State, must be based on an adequate criterion that legitimizes them as taxes or any other reality capable of overriding the aforementioned constitutional guarantee and prohibition.

4.12. In the Claimant's view, particularly indicative of this unconstitutionality is the permanent character (as opposed to transitional), without a set end date that, in contrast with the tax systems that inspired them, the Portuguese measures of autonomous taxation on remuneration of managers, directors and administrators.

4.13. The Claimant further considers that this taxation is justified solely due to the intervention that the State was forced to undertake in the financial sector, and thus it makes no sense for it to be applied indiscriminately to other sectors.

4.14. The Claimant therefore considers that the provision contained in subparagraph b) of no. 13 of article 88 of the CIRC suffers from unconstitutionality due to violation of articles 2 (democratic rule of law, with the inherent principles of proportionality and equality), 13 (principle of equality), 18, nos. 2 and 3 (principle of proportionality) and 104, no. 2 (principle of taxation, fundamentally, of real income and, in conjunction with the principle of equality, principle of taxpaying capacity), all of the Portuguese Constitution.

4.15. And due to violation of the principles of private initiative, private property, including means of production, and freedom of business management and organization, which are derived or deduced from articles 62 (right to private property), 80, subparagraph c) (freedom of initiative and business organization), 81, subparagraph f) (freedom of business management, which has as its counterpoint a State that promotes neutrality as opposed to creating distortions) 82, nos. 1 and 3 (guarantee of the existence of the private sector) and 86, no. 2 (prohibition of intervention by the State in the management of private enterprises), all of the CRP.

4.16. The Claimant thus considers to have paid tax in an amount exceeding what is legally due (namely field 368 of form 10), whereby, once the illegality of the (self-)assessments of autonomous taxation on bonuses as here petitioned is declared, it would have the right not only to reimbursement thereof, but also, under article 43 of the General Tax Law (LGT), to compensatory interest.

4.16. In support of its positions, the Claimant attached a learned opinion subscribed by Professors Doctor Eduardo Paz Ferreira and Clotilde Celorico Palma.

  1. In turn, the Respondent Tax Authority and Customs presented a response, in which it defended itself in the following terms:

5.1. By way of exception, the Tax Authority first invokes the untimeliness of the petition for arbitral pronouncement regarding the IRC self-assessment acts relating to the fiscal years 2010 and 2011, since, constituting an error attributable to the services within the meaning of article 266 of the Constitution and article 2 of the RJAT, the 90-day period provided for in article 10 of the RJAT, which would be counted from the end of the period for voluntary payment of the tax, in accordance with articles 102, nos. 1 and 2 of the CPPT, would have elapsed. This is because the claimant did not challenge the express dismissal of the administrative appeal, but only the self-assessment acts.

5.2. Equally by way of exception, the Tax Authority invokes the unsuitability of the review petition presented by the Respondent, under penalty of violating the Constitution and the Law, since the Administration cannot address the unconstitutionality of the law, to which it is bound in accordance with article 266 of the Constitution, as this does not constitute an error attributable to the services.

5.3. By way of argument on the merits, the Tax Authority argues that the reason for autonomous taxation is not found in the simple collection of more tax, but aimed primarily at discouraging the use of the type of expenses that it taxes, which by their nature are conducive to concealed income and, ultimately, even permit the recovery of some tax that ceased to be paid by the beneficiary of the income, transferring responsibility from this to the sphere of whoever pays that income.

5.4. Which gives it a clear anti-abuse nature, manifestly accessory/complementary to taxation according to the taxpaying capacity revealed by income, even if only apparently to the detriment of real income taxation (that is, based on accounting) in that what is intended with them is precisely to prevent abusive use of certain expenses and distribution of dividends and in fraud of rules aimed at reaching the real income of taxpayers.

5.5. In this framework, the provision of article 88, no. 13, b) CIRC aims solely to conduct a specific fight against behaviors considered risky or potentially suspicious — the attribution of excessively high bonuses and other variable remuneration.

5.6. Faced with the payment of bonuses to administrators of intervened banks, the legislator decided to discourage companies in various sectors from excessively remunerating their boards, specifically during a period of acute shortage, of worsening public debt and economic recession.

5.7. Beyond discouragement, the basis of this taxation rested on reasons relating to a more just distribution of tax burdens and progressive moralization of companies' remuneration policies.

5.8. Whereby, autonomous taxation not being limited to the classical purpose to which, as a rule, taxes apply themselves, to the obtaining of means intended for the satisfaction of the financial needs of the State and other public entities, but also pursuing extrafiscal objectives, such as the equitable redistribution of wealth and the just distribution of burdens.

5.9. And the same autonomous taxation does not cause any discrimination among workers, since, in accordance with article 104, no. 1, b) of the CIRC, it is to legal entities that it falls to proceed with payment of the tax, which will result from the determination, completion and submission of the income return, form 22.

5.10. The Respondent further considers incorrect the interpretation advocated by the Claimant in relation to article 88, no. 13 b), as, if the legislator had intended that the taxation would apply only to the amount exceeding €27,500 or the limit of 25% of annual remuneration, it would have reflected this in the drafting of the legal provision, which manifestly did not occur.

5.11. Consequently, the Tax Authority considers that the self-assessment acts relating to the fiscal years 2010 and 2011 merit no censure, suffering no defect of violation of law, nor do the decisions dismissing the administrative appeals presented by the Claimant merit any censure.

5.12. Regarding compensatory interest, the Tax Authority argues that, even if it were configurable, which it is not, the payment of compensatory interest in the present situation would have as its initial term the date on which notification of the decision dismissing the administrative appeal procedure occurred.

  1. Having been given the opportunity to respond to the exceptions presented by the Respondent, the Claimant did so in the following manner:

6.1. The period provided for in article 10, no. 1, RJAT for challenging tax acts, in cases where an administrative appeal has been filed, is 90 days counted from the decision dismissing the administrative appeal, with the same not needing to be autonomously challenged.

6.2. The subjection of the Tax Authority to the principle of legality does not obviously prevent it, in these particular functions of judging legality, from freeing itself from the strict constraints of hierarchy, for the simple reason that constitutional norms and principles are also part of the legal order (and with particular legal force) or legal framework (constitutional law) that it is important to consider and apply.

6.3. It would, moreover, be unconstitutional, for violating both the constitutional principle of access to courts for protection of rights, provided for in articles 20, no. 1, and 268, no. 4, of the CRP, as well as the constitutional principle of protection of legitimate expectations (which is derived from article 2 of the Constitution — rule of law), the interpretation of the provision in article 2, subparagraph a), of Regulation no. 112-A/2011, and article 10, no. 1, subparagraph a), of the RJAT, contrary to its declarative interpretation, that the 90-day response period, which opens with the express dismissal of the administrative appeal, would not permit raising matters of unconstitutionality before the Arbitral Tribunal.

II - PROCEDURAL REQUIREMENTS

  1. The necessary requirements for an arbitral decision to be issued are met. Effectively:

7.1. The sole arbitral tribunal is regularly constituted. It is materially competent, in accordance with article 2, no. 1, subparagraph a) of the RJAT.

7.2. The parties have legal personality and capacity, are legitimate and are legally represented (see articles 4 and 10, no. 2, of the RJAT and article 1 of Regulation 112/2011 of 22 March).

7.3. The requirements provided for in no. 1 of article 3 of the RJAT being met, the joinder of the petitions for annulment of the tax acts that are its subject is admitted in the present proceedings.

7.4. The proceedings do not suffer from defects that would invalidate them.

III. DETERMINATION OF THE ISSUES TO BE DECIDED

  1. The exceptions which, as they may prevent knowledge of the merits of the case, must be resolved previously are the following:

a) timeliness of the petition for arbitral pronouncement;

b) impossibility for the Arbitral Tribunal to pronounce on the constitutionality of the law, given that, since the Tax Administration is bound by the same, there would be no error attributable to the services.

Should the merits of the case be judged, which would occur if none of the exceptions are deemed well-founded, they will concern the review by this Tribunal of:

a) the alleged illegality of the IRC self-assessment acts of the A... Group of Companies relating to the fiscal years 2010 and 2011, insofar as it relates to autonomous taxation, with its consequent annulment, should the alleged illegality be deemed well-founded;

b) the existence of the Claimant's right to compensatory interest at the statutory rate, calculated from the date on which the tax was paid.

IV. PROVEN FACTS

  1. Before proceeding to the assessment of the questions thus stated, beginning with the dilatory exceptions and proceeding, in the event that none of those are accepted by the Tribunal, to knowledge on the merits, it is necessary to present the factual matter relevant to its understanding and decision, which, having examined the documentary evidence and the tax administrative proceedings attached, and in light of the facts alleged, is established as follows:

9.1. The claimant is a company, head of a "Group" [A...] dedicated to the industrial area, which filed on 31 May 2011 its consolidated IRC return Form 22 relating to the fiscal year 2010 (see Doc. no. 1), and on 28 May 2012 its consolidated IRC return Form 22 relating to the fiscal year 2011 (see Doc. no. 2).

9.2. And on 30 August 2012 filed an amended return with respect to the fiscal year 2011, [from which the value of the autonomous taxation on bonuses in question was reduced] (see Doc. no. 3).

9.3. In those returns, it proceeded to self-assess the autonomous taxation.

9.4. The value of both the IRC, including state surcharge, and the autonomous taxation, has been paid (Docs. nos. 1, 2 and 3 — field 368, form 10).

9.5. Among such taxation, relating to the fiscal year 2010, was €455,000 in autonomous taxation relating to premiums paid to directors [(article 88, no. 13, subparagraph b), of the CIRC)] by the company forming part of the fiscal group A..., B... SGPS (Doc. no. 4), and relating to the fiscal year 2011, autonomous taxation of the same nature in the amount of €130,888.45 (Doc. no. 5) [See summary tables in articles 5 and 6 of the petition for arbitral pronouncement reproduced in 4.3 and 4.4).

9.6. On 24 May 2013, the claimant filed, with the Tax Office of …, administrative appeals against the aforementioned autonomous taxation self-assessments relating to the fiscal years 2010 and 2011, contained in the IRC return form 22 (see copy of the cover sheets of the administrative appeals - Docs. nos. 6 and 7).

9.7. On 14 November 2013, the claimant was notified of the dismissal of the aforementioned administrative appeals relating to autonomous taxation on variable remuneration/bonuses for the fiscal years 2010 and 2011, considering, in summary, in the respective decision of the Chief of the Tax Management and Assistance Division of the Large Taxpayers Unit, that: (1) the services of the Respondent are prevented from addressing the alleged unconstitutionality of article 88, no. 13, subparagraph b) of the CIRC; (2) the self-assessment acts do not suffer from illegality, insofar as they concern the imposition of autonomous taxation on bonuses remunerated to the Claimant's corporate bodies - more specifically, as regards the bonuses/variable remuneration attributed by the subsidiary B... — Investments and Holdings, SGPS to its directors, given that the minimum requirements for the application of the aforementioned rule were met: amounts paid as bonus, exceeding 25% of annual remuneration, and of value exceeding €27,500.00 (…)" (Docs. nos. 8 and 9).

9.8. In 2010, bonuses were attributed that were subject to autonomous taxation to 6 directors of B... — Investments and Holdings, SGPS [commercial company forming part of the fiscal group "A..."], such that the highest of the thresholds exceeded by these bonuses was always that relating to 25% of their respective remuneration (Doc. no. 15).

9.9. In the fiscal year 2011, the claimant attributed bonuses that were subject to autonomous taxation to three directors, such that the highest of the thresholds exceeded by these bonuses was always that relating to 25% of their respective remuneration (Doc. no. 16).

9.10. B... SGPS, as sub-holding of the A... group, pays variable remuneration that relates to the management of the entire group which was comprised of 14 companies in 2010 and 15 companies in 2011 (see Docs. nos. 17 and 18).

9.11. The claimant presented the present petition for arbitral pronouncement on 31 December 2013.

9.12. There are no unproven facts of relevance to the decision of the case.

  1. The proven facts, in addition to being documented [without challenge of the respective documents], result equally from the failure of the Tax Authority and Customs to challenge any of the alleged facts and also, and essentially, from the tax administrative process itself.

V. ON THE LAW

  1. It is necessary, therefore, to assess and decide. Let us examine these questions:

A) On the exception regarding untimeliness of the petition for arbitral pronouncement.

  1. It appears from the proven facts that the Claimant filed the administrative appeal against the self-assessments in question on 24 May 2013, and thus at a moment subsequent to the entry into force of Law no. 64-B/2011 of 30 December, which altered the drafting of article 57, no. 1, of the LGT, shortening the Tax Administration's period for express decision from six to four months, after which, as determined by article 57, no. 5, of the LGT, dismissal of the petition occurs.

  2. On 14 November 2013, the Claimant was notified of the express dismissal of that administrative appeal, and in this case subparagraph a) of no. 1 of article 10 of the RJAT assigns a period of 90 days for challenging such dismissal, which is moreover in discord with the much shorter period assigned for the purpose in article 102, no. 2, CPPT.

  3. It happens, however, as the Tax Authority rightly points out, that the Claimant in its petition makes no reference to challenging the decision dismissing the administrative appeal, limiting itself to making mention of such dismissal in articles 12 and 14 of the initial petition, as mere justification for asserting the timeliness of the petition.

  4. As sustained by JORGE LOPES DE SOUSA, "limiting the jurisdiction of the arbitral tribunals operating at the CAAD, as far as assessment acts, self-assessment, withholding at source and payment on account are concerned, only acts of dismissal of administrative appeals or hierarchical appeals or petitions for recourse of tax acts will be included in such jurisdiction in cases where such second-degree or third-degree acts actually addressed the legality of acts of assessment, self-assessment, withholding at source and payment on account, and not also when such acts refrained from such knowledge, because it was understood that there was some obstacle to this (…). Effectively, in cases where the second-degree or third-degree act addresses the legality of the assessment act, the dismissal of the administrative appeal or hierarchical appeal makes their respective illegalities its own, whereby from the assessment of the legality of the second or third-degree act results the illegality of the assessment act"[2].

Consequently, the Author maintains that at the CAAD "what is permitted through challenging the administrative appeal decision is to assess the legality of the underlying assessment, self-assessment, withholding at source and payment on account acts, and not the administrative appeal decision itself which did not address the merits of the taxpayer's claim"[3].

  1. From this it follows that the application of the period provided for in article 102, no. 2, CPPT, relevant for purposes of article 10, no. 1, a) of the RJAT depends on challenging the express dismissal of the administrative appeal, as a second-degree act. As the Claimant made no reference to such challenge, and limited itself to challenging the assessments, it would have had to do so within the period provided for in article 102, no. 1, and article 10, no. 1, of the RJAT.

  2. If the commencement of the period for challenging is initiated from the day following the end of the voluntary payment period of the tax obligation, in accordance with article 102, no. 1, a) CPPT, such periods would have begun on 31 May 2011, in relation to the fiscal year 2010, and 28 May 2012 - 30 August 2012 in relation to the fiscal year 2011, whereby, having the petition for arbitral pronouncement entered only on 31 December 2013, it is untimely.

  3. The same situation of untimeliness occurs if we wish to count such period from the formation of the presumption of tacit dismissal of the administrative appeal, referred to in article 102, no. 1, d) CPPT.

  4. Effectively, the administrative appeal in question was filed at a moment already subsequent to the entry into force of Law no. 64-B/2011 of 30 December, which altered article 57, no. 1, of the LGT, reducing the Tax Authority's period for express decision to four months, after which the dismissal of the petition is presumed.

  5. Although it relates to tax facts prior to the entry into force of that Law, it is the moment of filing of the administrative appeal that is relevant for assessing the procedural norms applicable, in light of the immediate application of the same determined by article 12, no. 3, of the LGT.

  6. Whereby, once the presumption of tacit dismissal is formed, the period for filing the petition for constitution of the Arbitral Tribunal is 90 days, in accordance with article 10, no. 1, a) RJAT and article 102, no. 1, d) of the CPPT.

  7. It appears from article 57, no. 3, of the LGT and article 20, no. 1, of the CPPT that this period is continuous, being counted in accordance with article 279 of the Civil Code.

  8. Having the administrative appeal been received by the competent service on 24 May 2013, it is presumed to be tacitly dismissed on 24 September of the same year, in accordance with article 57 of the LGT, whereby the petition for constitution of the Arbitral Tribunal should have been filed by 24 December of the same year, with its presentation on 31 December being untimely.

  9. The present petition could, however, be considered timely if the CAAD were deemed equivalent to a court, for purposes of application of article 279 e) of the Civil Code, considering that the period transfers to the end of judicial vacations.

  10. Such equivalence does not result from the provision in article 17-A of the RJAT, since we are not dealing with a procedural period, to which alone this norm refers, but rather with the period for requesting arbitral pronouncement.

  11. However, the equivalence of the CAAD to a court for purposes of extending the arbitral pronouncement would make no sense, as we are not dealing with a judicial tribunal, where during judicial vacations only urgent acts are performed, with the CAAD secretariat being permanently open to receive any petition for arbitral pronouncement presented to it.

  12. Precisely for that reason, it was decided in this Center of Arbitration in case 125/2012 that judicial vacations do not extend the period for requesting arbitral pronouncement.

  13. Consequently, the petition for constitution of the arbitral tribunal is untimely, as it only filed on 31 December 2013.

  14. Untimeliness, translated into the forfeiture of the right to request arbitral pronouncement, constitutes a dilatory exception, which implies the dismissal of the instance by the Tax Authority and the extinction of the present instance (article 278, no. 1, e) CPC).

  15. The resolution of this prior question affects the assessment of the other questions raised by the Claimant, in accordance with article 608, no. 2, CPC, applicable by reference to article 29, no. 1, a) RJAT.

V – DECISION

In view of the foregoing, this Arbitral Tribunal decides:

— to dismiss the Respondent from the instance, by virtue of the untimeliness of the petition for arbitral pronouncement filed by the Claimant;

— to condemn the Claimant to bear the costs of the present proceedings.

Value of the Proceedings

In accordance with the provision in article 306, nos. 1 and 2, of the CPC, article 97-A, no. 1, subparagraph a), of the CPPT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €585,888.45.

Costs

In accordance with article 22, no. 4, of the RJAT, the amount of costs is fixed at €8,874.00 in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Lisbon, 16 June 2014

The Arbitrators

(Jorge Lino Ribeiro Alves de Sousa)

(José Poças Falcão)

(Luís Menezes Leitão)

[1] Unless otherwise expressly indicated, the documents referred to were attached with the petition for arbitral pronouncement (initial petition)

[2] See JORGE LOPES DE SOUSA, Commentary on the Legal Framework for Tax Arbitration, in NUNO VILLA-LOBOS / MÓNICA BRITO VIEIRA (org.), Guide to Tax Arbitration, Coimbra, Almedina, 2013, p. 123.

[3] See JORGE LOPES DE SOUSA, Commentary, p. 125.

Frequently Asked Questions

Automatically Created

What are autonomous taxation rules for variable remuneration (bonuses) paid to company directors under Portuguese IRC?
Autonomous taxation rules under Article 88(13)(b) of the IRC Code apply to variable remuneration (bonuses) paid to company directors when such payments exceed €27,500 or 25% of the director's total annual remuneration, whichever is higher. Once these thresholds are exceeded, autonomous taxation is levied at rates of 35% (or 45% if the company reports tax losses). This taxation applies independently of the company's taxable profit and is not deductible for IRC purposes. The interpretation of whether only the excess amount or the entire bonus is subject to taxation has been contested, with taxpayers arguing that a restrictive interpretation should apply, taxing only amounts above the threshold rather than the total bonus payment.
How does the special tax group regime (RETGS) affect the autonomous taxation of executive bonuses under Article 88(13)(b) of the IRC Code?
Under the special tax group regime (RETGS - Regime Especial de Tributação de Grupos de Sociedades) established in Article 69 et seq. of the IRC Code, consolidated tax returns are filed by the parent company on behalf of all group members. Autonomous taxation on director bonuses paid by subsidiary companies within the fiscal group is reported in the consolidated Form 22 IRC return submitted by the dominant company. The parent company self-assesses and pays all autonomous taxation amounts for the entire group, including those arising from variable remuneration paid by individual group members to their directors. This consolidation means the dominant company is responsible for both the assessment and payment of autonomous taxation, and subsequently has standing to challenge such assessments and claim refunds for the entire group through administrative appeals or tax arbitration proceedings.
Can a dominant company in a fiscal group claim a refund of autonomously taxed amounts on director premiums for IRC purposes?
Yes, a dominant company in a fiscal group can claim a refund of autonomously taxed amounts on director bonuses through CAAD tax arbitration proceedings. The procedure involves: (1) filing administrative appeals (reclamações graciosas) with the relevant tax authority within the statutory deadline; (2) if the appeals are dismissed, filing a petition for arbitral pronouncement with CAAD under Decree-Law 10/2011 (RJAT); (3) constitution of an arbitral tribunal (sole or collective) according to Articles 6 and 10 of RJAT; and (4) presentation of arguments challenging the legality of the self-assessment acts. If the tribunal finds the autonomous taxation unlawful, the claimant is entitled to reimbursement of improperly paid amounts plus compensatory interest (juros indemnizatórios) at the statutory rate, calculated from the date the tax was paid until full reimbursement. The claim must be based on illegality grounds such as incorrect interpretation of tax law provisions or constitutional violations.
What is the procedure for challenging IRC self-assessments on autonomous taxation through CAAD tax arbitration in Portugal?
To challenge IRC self-assessments on autonomous taxation through CAAD, taxpayers must: (1) first exhaust the administrative appeals process by filing reclamações graciosas with the competent tax office within the statutory period (typically 120 days from notification or self-assessment); (2) upon dismissal of the administrative appeal, file a petition for arbitration with the Centro de Arbitragem Administrativa (CAAD) under Articles 3 and 10 of Decree-Law 10/2011; (3) pay the required arbitration fees and decide whether to appoint an arbitrator or allow appointment by CAAD's Deontological Council; (4) present legal and factual grounds demonstrating the illegality of the self-assessment, which may include incorrect application of tax law, constitutional violations (equality, proportionality, taxpaying capacity principles), or procedural defects; and (5) request specific relief including annulment of the assessment, tax reimbursement, and compensatory interest. The arbitral tribunal is regularly constituted and issues binding decisions on the legality of the contested tax acts.
Are compensatory interest (juros indemnizatórios) available when autonomous taxation on director bonuses is deemed unlawful?
Yes, compensatory interest (juros indemnizatórios) is available when autonomous taxation on director bonuses is deemed unlawful. Under Portuguese tax law, when a taxpayer prevails in challenging a tax assessment and demonstrates that tax was improperly collected, the Tax Authority must reimburse not only the principal amount but also compensatory interest at the statutory rate. This interest is calculated from the date the tax was paid (or, for self-assessments, from the deadline for voluntary payment) until the date of actual reimbursement. In Process 9/2014-T, the claimant specifically requested compensatory interest calculated from September 1, 2011 for the 2010 fiscal year amount (€455,000) and from September 1, 2012 for the 2011 fiscal year amount (€130,888.45). The purpose of compensatory interest is to compensate taxpayers for the financial loss resulting from being deprived of funds that were unlawfully collected, ensuring full restitution and discouraging improper tax assessments by the State.